2023-07-27 12:37:00 ET
Summary
- Strong Q2 GDP +2.4% vs. 1.5% expected further undermines the recession narrative.
- Everybody wants to go on a cruise. Royal Caribbean results show strong demand.
- Which quant strategies have been on the money so far? BofA lists the best outperformers.
Listen below or on the go on Apple Podcasts and Spotify
This is an abridged transcript of the podcast.
Our top story in today’s session –
GDP blew away forecasts for slowing growth in the second quarter. It rose at an annual rate of 2.4%, well ahead of forecasts for 1.5% and up from 2% in Q1.
Growth was driven by consumer spending, nonresidential fixed investment, state and local government spending, private inventory investment, and federal government spending. Drags were decreases in exports and residential fixed investment.
Along with that, there were further signs of disinflation. The PCE price index was up +2.6%, down from +4.1% in Q1. The core PCE price index, ex food and energy, was up +3.8% vs. +4.0% consensus.
Pantheon Macro sees softer consumption in Q3 and “especially Q4, when student loan repayments start again,” but for now growth is holding up.
Wells Fargo says “the U.S. economy is weathering the fastest rate hikes in a generation without much damage to the major gear-works of the economy.”
ING says the Goldilocks GDP number fuels the soft-landing narrative but warns that “tighter monetary policy plus tighter lending conditions will increasingly restrain economic activity and growth will slow and possibly contract from the fourth quarter.”
GDP was the headliner in a big lineup of strong data, including better-than-expected durable goods orders and jobless claims falling unexpectedly.
Taken all together, Wells Fargo says the “path to avoiding recession looks clearer today than it did even a few weeks ago.”
Now a look at today’s trading, stocks are rallying, with growth the clear leader after failing to react much to the Fed’s hike on Wednesday.
The Nasdaq (COMP.IND) is up 1.75% thanks to a post-earnings surge in Meta Platforms (META).
The S&P (SP500) is up 0.75%, with the Communication Services (XLC) sector jumping more than 3% with the Meta assist. Info Tech (XLK) follows, up 1%.
The Dow (DJI) is trailing, up slightly after matching a record 13-day win streak yesterday.
The strong economic data is putting upward pressure on rates. The 2-year Treasury yield (US2Y), most closely tied to the fed funds rate, is up 8 basis points, back above 4.9%. The 10-year (US10Y) is up around 3.95%.
Oil (CL1:COM) is up 1% on anticipation of more demand, while gold (XAUUSD:CUR) is slumping 1.3% as rates move up and inflation cools. The dollar (DXY) is up a little less than 1%.
Now let’s turn to the tsunami of premarket earnings.
Comcast (CMCSA) beat on earnings and revenue. Results were driven by Mario and pals at the box office and the Peacock streaming service , which doubled subscribers from a year ago. Those helped counter weakness in broadband.
McDonald's (MCD) beat on the revenue and EPS lines and topped comparable sales forecasts in all regions .
Shell's (SHEL) Q2 earnings tumbled, missing estimates, but the oil giant launched a $3 billion buyback program .
Honeywell (HON) missed on revenue , while Mastercard (MA) beat consensus .
And cruise line stocks overall rallied as Royal Caribbean (RCL) smashed forecasts and raised guidance. RCL said demand for cruises is exceptionally strong and noted that it has seen another step change in booking volumes and pricing.
In the Wall Street Research Corner –
Even with the strong GDP number, the economy isn’t out of the recession woods yet. As SocGen’s Albert Edwards puts it, everyone tends to give up on their recession predictions right when the downdraft hits.
For those in the recession camp, BlackRock is bullish on healthcare stocks . Over the last seven recessions Healthcare (XLV) has outperformed by outshined the broader market by an average of 10%.
They note that the sector is still “at a 10% discount to global equity markets, compared to an average premium of 3% over the past two decades."
Healthcare is also relatively resilient during times of high inflation. Added to that they are cheap compared to the broader market.
For those who prefer to invest by the numbers, BofA released a comprehensive look at how all its quant stock screens performed in the first half of the year.
Screens for Quality outperformed the benchmark S&P Equal Weight (RSP) gain of 6%, with a five-year debt-adjusted ROE screen returning 26%.
Screens for Risk and Small Size lagged in the first six months. Near term BofA likes higher quality companies with cash return and lower duration risks.
For further details see:
Wall Street Lunch: GDP Blows Past Forecasts